Seeking the right formula

Seeking the right formula

To the extent that e-commerce has burrowed its way into the ocean container business, it has been mostly in areas such as booking, documentation, tracking and the automation of service contracts. However, there is another critical process where Internet tools are just beginning to make a dent, but where the long-term impact could be enormous. That is the area of transportation procurement.

The idea of using the Internet to procure transportation began with trucking in the mid-1990s. Now it's gaining strength in ocean shipping, for several reasons. Having used e-procurement tools to cut costs for truckload, less-than-truckload and parcel transportation, shippers are now familiar with the benefits. In addition, the tools themselves are growing more sophisticated, offering shippers the ability to test the consequences of different sourcing decisions, such as the number of carriers to use, or to compare the effects of different transit times, before booking cargo.

"The utilization of optimization and procurement tools in the ocean world is definitely growing and has become more prevalent," said Gary Girotti, vice president for transportation planning at Chainalytics LLC, a supply-chain advisory firm in Atlanta that has advised a number of shippers engaged in contract bids.

A main driver of the use of Internet tools for procurement is the shippers' age-old objective in transportation: reduce cost. An AMR Research Report in October found that 35 Fortune 500 firms used "strategic transportation sourcing." The companies used e-procurement mostly in truckload transportation, but also in less-than-truckload and ocean shipping. They saved an average of 10.5 percent in transportation costs and achieved triple-digit returns on investment over a period of less than a year.

Basically stated, thousands of shippers go out to bid each year seeking ocean container services valued at hundreds of millions of dollars. They prepare lengthy bid packages that carriers must complete and return, often on short notice, if they want to see any of the shipper's business. Large shippers typically request rate proposals for thousands of individual routes. "The carrier is staring at three months of work, and he has two weeks to do it," said James Preuninger, chief executive of Management Dynamics Inc. "The scale of this sourcing is mammoth."

Several firms offer e-procurement tools applicable to ocean contracting, among them Inttra, Descartes Systems, GT Nexus, CombineNet, Freemarkets, Manhattan Associates, i2 and Manugistics. Others, including Management Dynamics, are developing procurement services. The services typically have two main components, Girotti said. There's a front-end tool, usually Web-based, that is run from the software company's server, which offers a blueprint for carriers to supply information. And there's a back-end optimization tool that crunches the numbers to determine the mix of transportation services that best serves a shipper's needs.

Although e-procurement tools are gaining more acceptance, their penetration in the ocean sector remains limited. A number of ocean contract services have become available only within the last year or so. One executive with a major container line said that at least 75 percent of the bid packages his company receives are still in the form of a spreadsheet sent as an e-mail attachment. After the carrier receives such a package, a laborious multi-week process ensues in which the container line prepares and submits its initial bids and then goes through up to three rounds as the shipper narrows the number of bidding carriers to the handful it will ultimately use.

But for a growing number of technology companies - some that specialize in procurement in general and others in transportation specifically - this rudimentary process is rich with opportunity.

When viewed in a vacuum, shipping is about price and little else. But as the shipping industry saw with the boom-and-bust trajectory of dot-com firms that pitted carriers against each other in reverse auctions, transportation buying is a complex undertaking. Considered in the context of larger corporate issues of strategy and profitability, transportation can become a matter of strategic sourcing where price is just one of many considerations that can have economic significance to the shipper. The more these considerations play a role in the process, the more beneficial transportation becomes to the shipper.

"You are not solving the problem by getting people to drop their prices," Preuninger said.

Some of the more advanced software tools allow shippers to weigh many considerations. If a shipper has traditionally had a policy of using only three carriers, for example, tools allow it to quantify the consequences of not expanding that number to four. If two carriers' transit-time proposals on a particular route differ by two days and several hundred dollars per container, systems can tell in an instant which one is the best choice, given the shipper's cost of capital for inventory.

"One of the huge value adds is the ability to conduct 'what if' analysis," Girotti said. "Companies don't really understand what is costing them money."

Pittsburgh-based CombineNet focuses on procurement in several industries, including chemicals, food products and health care. It approaches transportation from the point of view of tailoring shipping services to a shipper's unique requirements. The firm, founded by mathematicians, has handled 15 bid processes for shippers including DuPont, Beyer, Heinz, Kodak and Kellogg. Those firms saw an outright cost savings in the range of 5 to 16 percent. But the system goes beyond cost to address the reality of how the shipper approaches ocean transportation.

If a shipper wants to use APL because it likes its customer service, the system will allow that preference to be given value in the computation. If the shipper wants to weigh the lower rate from slower transit time against the company's cost of capital, that can be figured in as well, said Michael Concordia, CombineNet's vice president of marketing. In 2002, the system was used by shippers to quantify the impact of avoiding the U.S. West Coast in the months preceding the 10-day work stoppage during the lockout of longshoremen, he said.

Called a decision guidance system, the software is based on combinatorial science, which allows for computations based on both hard criteria, such as a requirement to use the Port of Long Beach for 50 percent of all containers, and soft criteria such as a preference for one carrier over another because the shipper has had a solid, longstanding relationship. The system also allows a carrier to express its preference for certain pieces of a shipper's business that fit nicely into the carrier's overall portfolio and could therefore be offered at a discount to the shipper.

Management Dynamics, a leader in automation of ocean carrier contracts, sees procurement in similar terms, yet is developing its bid-management tools to work in tandem with execution of contracts. "What is really needed is a system that will do the following: For a shipper, it will manage your decision criteria and your business rules," Preuninger said. "It would allow you to encode those rules and go through a combinatorial (process) to give you the right mix of solutions that is optimized to your business requirements."

But Preuninger said such technology is limited if it can't later be used when shippers or their agents book cargo based on the contract's terms. "You have to be able to take it to the next step after sourcing. You made decisions based on business rules; now you need to make sure that day to day, those contracts are used as you thought they would be used when you bought them," Preuninger said. "Our full vision on this is to support the order - how do I buy it, how do I manage it, and how do I settle and pay for it."

Descartes unveiled its procurement tool last March, said Cindy Yamamoto, vice president for ocean products and services at the Waterloo, Ontario-based supply-chain technology firm. The procurement tool allows shippers to conduct their bid process using Web-based tools. It can be integrated with Descartes' other services, including contract management, and allows for optimization by enabling the shipper to analyze the carriers' competing bids.

Another firm expanding into procurement by leveraging off existing services is the ocean carrier-owned portal Inttra. Its Inttra-Tender product is offered to shippers that commit to a minimum volume of Inttra's services for booking and shipping instructions. Inttra-Tender is not limited to Inttra's member carriers. It has handled some 50 tenders so far and has seen repeat business, said Ken Bloom, Inttra's chief executive. There is a one-time set-up cost of about $2,000, making the system cheaper than competing systems.

Instead of being focused on using advanced algorithms to quantify shipping costs, Inttra-Tender pays attention to the more basic problem of standardizing contract terminology, a benefit that Bloom said is fundamental to conducting a complex bid process. For example, a shipper might refer to the Port of Valencia, Spain, as simply Valencia, where a carrier might call it VLC. With a dictionary of synonyms, the system translates the codes and remembers the parties' idiosyncrasies. "The biggest part of this activity is to assemble multiple carriers' responses in a way that for the customer presents all of the various options. If a carrier responded in his own way, a shipper could not aggregate the data across the carriers," Bloom said. "Our goal is that this Inttra-Tender product become the industry standard."